In a March 30, 2010 opinion addressing two separate cases brought against Fidelity, the United States District Court in Massachusetts denied Fidelity’s motions to dismiss employment retaliation claims under Section 806 of the Sarbanes-Oxley Act (SOX). The court rejected Fidelity’s argument that the SOX claims should be dismissed because the whistleblower plaintiffs were not employees of publicly held investment companies covered under SOX (i.e., the Fidelity mutual funds) but, rather, were employees of privately held Fidelity entities (i.e., Fidelity Brokerage Services and Fidelity Management & Research). The court’s holding breaks with prior Department of Labor administrative decisions – as well as the rulings of other federal district courts – which concluded that the SOX whistleblower provision does not cover employees of non-public affiliates or agents of public companies.
The Massachusetts court acknowledged that “the statutory text is far from pellucid” regarding whose employees are covered. The court ultimately concluded, however, that Section 806 protects employees of “contractors, subcontractors, or agents” of public companies, provided those employees establish the “protected activity” and retaliation prongs of the statute. In turn, the court found that the non-public Fidelity affiliates that employed the plaintiffs fell within this ambit in light of their operational relationships with the publicly held Fidelity investment companies.
In the end, the court appeared to be guided primarily by its view of the broader preventative, punitive, and remedial purposes of SOX. The court observed: “If Section 806 only protected employees of public companies, then any reporting of fraud involving a mutual fund’s shareholders would go unprotected, for the very simple reason that no ‘employee’ exists for this particular type of public company.” If the court’s interpretation stands and is adopted elsewhere, it could have significant implications for privately held mutual fund complexes in the SOX arena.